How do you pull a bunch of LBO commitments off of your balance sheet? Sell them to the borrowers, and finance the transaction. How does that pull the debt off your balance sheet? Denial, my friends, ain't just a river in Egypt.
Citigroup sold $8 billion of the debt to private-equity firms this month only after giving buyers $6 billion of financing at cheaper rates than it can borrow itself, according to people familiar with the transaction, who declined to be identified because the terms aren't public. Deutsche Bank AG and Royal Bank of Scotland Plc are also offering credit to buyers to help cut their holdings. (Emphasis mine).[...]
Banks escaped about $65 billion of LBO commitments in the past four months in part by lending money to private equity firms such Blackstone Group LP's GSO Capital Partners and Apollo Management Inc. Wall Street is getting rid of the debt individually, in packages or placing it into structures such as collateralized loan obligations, which pool loans and slice them into pieces with various ratings to sell to investors.
"They're substituting one credit for another but they're still ultimately on the hook for the debt,'' said Robert Willens, a former managing director Lehman Brothers Holdings Inc. who runs a tax-advisory firm in New York.
The rest of the inventory was reduced because acquisitions such as Blackstone's $6.6 billion of Dallas-based credit card processor Alliance Data Systems Corp. were canceled, eliminating the bank commitments.
By offering to finance the sales, banks can receive higher prices for the loans.
Now maybe it's just me, but providing loans at rates lower than your own cost of capital to firms to buy your loans sounds, shall we say, uniquely Wall Street. Then again, perhaps the increased price financed debt purchases commanded made up the difference. If nothing else, this is an interesting data point for how desperate banks are to shed the debt, and what effects fire sales have on price (i.e. very and brutal).
UPDATE: One DB tipster indicates that some loan financing deals (that sounds funny, doesn't it) are leveraged up to 10:1. Ouch.
Pandit's `Closer to End' Means No Escaping LBO Loans [Bloomberg]
Posted by guest , Apr 29, 2008 9:43AM
come on EP. you know your risk is greatly reduced when your counterparty is a private equity firm instead of a highly levered corporate.
Posted by ep , Apr 29, 2008 9:47AM
"come on EP. you know your risk is greatly reduced when your counterparty is a private equity firm instead of a highly levered corporate."
You clearly haven't spent much time with private equity firms.
Posted by guest , Apr 29, 2008 9:49AM
@ep i think he/she was just being sarcastic
Posted by GinNTonic , Apr 29, 2008 10:00AM
Actually 9:43 would be right if their was a fund guarantee on the term loan, which many sponsors are kosher with, but I assume Schwarzman would rather sacrifice his first born rather than put a guarantee on one of his funds.
Posted by guest , Apr 29, 2008 10:20AM
what is really the 'risk' with these senior secured loans? very little as you are at the top of the cap structure. But they trade in the mid 80s. The risk for banks is that they have to keep marking them lower as the market irrationally prices them in the 80s. I think banks fear not the exposure to the name but the exposure to volatility. of course as well as the ability to free up a portion of the BS so they can actually write commitments again and start earning fees.
Posted by guest , Apr 29, 2008 10:23AM
GinNTonic: I think there is already a second lien on Schwarzman's first born
Posted by 36th Chamber , Apr 29, 2008 10:26AM
Yeah, but he's still not putting any guarantees on his funds.
Posted by guest , Apr 29, 2008 10:27AM
so....they're selling deals they love at a discount?
Posted by ep , Apr 29, 2008 10:28AM
"@ep i think he/she was just being sarcastic"
It was way to early for that.
Posted by ep , Apr 29, 2008 10:29AM
"what is really the 'risk' with these senior secured loans? very little as you are at the top of the cap structure."
Bah hah hah hah hah hahahah!
That's was a good one.
Posted by guest , Apr 29, 2008 10:45AM
Some of these loans, emphasis on the some, actually aren't that risky given the recovery in a default.
Posted by guest , Apr 29, 2008 10:45AM
with citi financing 6B of the 8B purchase, they are turning a 0-100% risk into a 25%-100%. this is not a bad deal at all given that the underlying are 1st lien loans which are first in line for all assets and cashflows in a bankruptcy
the above describes a non-recourse transaction, now if citi has full recourse to the pe firms, then vik is only taking counterparty risk since the pe firms are on the hook for the entire 0 to 100% portion like in loan TRS
Posted by guest , Apr 29, 2008 10:58AM
Say what you want about EP, she does write about finance...
Bess Bess "writes" snarky comments about people who work in finace.
I'll take EP over Bess anyday.
Posted by guest , Apr 29, 2008 11:03AM
good to know, 10:58. now run back to your teller's window, boy.
Posted by guest , Apr 29, 2008 11:04AM
"Say what you want about EP"
--okay: she's not funny.
Posted by guest , Apr 29, 2008 11:12AM
if i wanted to read about finance for finance (which i don't, it's what i do all day), i'd read dealbook.
Posted by GinNTonic , Apr 29, 2008 11:28AM
10:45 that's not the best comparison.
I. You get L+350 (whatever the cap/flex is) and hopefully, if it's a decent credit, you get 100% of your principal in 5-7 years. Or if things get better, get refied in the next 3-4 years.
II. You get L+75-125 (decent ballpark), you lose 10-15 pts off the loan (which is a real cash loss). You are free to make more crappy commitments to other deals left to hang.
Posted by guest , Apr 29, 2008 1:05PM
Banks also look at it in terms of subordination. When you get hung with a warehouse/commitments you have 100% exposure to the value of the assets. If you create a CLO and fund the senior tranche then you can get significant first loss underneath you. That's why banks are willing to take losses by selling sub debt in the large balance sheet CLOs at significant discounts, it can still result in lower losses in the end. Remaining exposure is to a smaller par amount of CLO debt, which you can also try to syndicate if you structure it well enough. It's essentially the same logic as liquidating inventory via a TRS in this environment - just finance the assets, let someone else put up first loss, and pray that they don't default on the termination payment. If your counterparty will secure it with other assets, it can be a very good trade for you. It's not about return from a bank perspective, it's about CYA.
btw, senior loans have recovered ~80% historically but the expectations built into the loan CDS index have already been revised lower for the flow names. Nobody expects overall recoveries to be as strong this time around.
Obviously, I'm a guy who was let go from a CLO/leveraged loan trading group and now has too much free time...
Posted by guest , Apr 29, 2008 1:09PM
Chill out fisher
Posted by ep , Apr 29, 2008 1:09PM
I think the comments miss the point. Replacing debt with debt is a poor deleveraging strategy. Accounting arbitrage is a valid alpha generator, but not a real creator of wealth.
Posted by ep , Apr 29, 2008 1:11PM
"if i wanted to read about finance for finance (which i don't, it's what i do all day), i'd read dealbook."
If you call DealBook finance, well, I guess I don't have many words for that.
Posted by guest , Apr 29, 2008 1:17PM
Carney writes about finance, Bess takes the cheap shots. EP is trying (poorly) to bridge a perceived gap. There is NO gap!
Posted by Anal_yst , Apr 29, 2008 1:19PM
@ GinNTonic
Thats true, but you forget (as others have pointed out), getting them off their books at a higher price (somewhat) offsets the lower yield, and sheilds them (ceteribus paribus) from further mtm losses
Posted by guest , Apr 29, 2008 1:28PM
@1:17...carney writes about finance because he's not funny. bess writes the funny stuff because she seems to have little interest in finance...her jokes are only 'cheap shots' if you've got paper thin skin.
Posted by guest , Apr 29, 2008 1:40PM
@1:28 My point apparently wasn't in your strike zone. Call BL's work whatever you want, I like it. Point is - EP's writing sucks.
Posted by guest , Apr 29, 2008 2:35PM
If EP's writing sucks so bad, then how come so many readers have major crushes on her based only on information she has conveyed through writing? Hmm?
EP: so hot right now.
Posted by guest , Apr 29, 2008 2:36PM
I guess they haven't seen her yet.
Posted by guest , Apr 29, 2008 2:39PM
@2:35. I bet readers developed major crushes on Ayn Rand as well....then they got a good look at her!
Posted by guest , Apr 29, 2008 2:40PM
Sometimes I like to sit and wonder if maybe I have seen EP in a crowd on the street but just didn't know it was her. But then I think, no, somehow I would know it was her if I saw her.
Posted by GinNTonic , Apr 29, 2008 2:42PM
@ ep,
since when were bankers "real creators of wealth"? We do appreciate any compliments we can get though. On that point though, would you rather have a $100 loan to a crackhead, or would you rather have a $75 loan to Steve Crab Hands, who then loans to the crackhead.
@Anal_yst
You're right, I forgot to add in the scenario III, where you sell at 20-25 pts discount
Posted by guest , Apr 29, 2008 2:47PM
the point about readers developing crushes on ep pointedly has nothing to do with what she does or doesn't look like. to respond to that, which is what 2:35 was getting at, I would say that the readers who have developed crushes on her 'based only on information she has conveyed through writing' apparently go for girls or guys with little sense of humor and a hatred of the swiss.
Posted by guest , Apr 29, 2008 3:02PM
Anyone who thinks EP is humorless hasn't read Adventures in Diligence II.
Posted by guest , Apr 29, 2008 3:07PM
EP is at her best when she is writing about deals she works on. She has a narrative and she does that very well.
If you like or dislike her other stuff well, that's really just a matter of personal taste whether you are interested in her philosophy on this or that point isn't it? It's not really a stylistic issue.
Posted by guest , Apr 29, 2008 4:50PM
Gin, 10:45 here,
first of all, loans haven't been at l+350 for a while. they blew by that figure in early jan and never looked back. at the current ballpark price of 90, the spread is more like L+500 (to a 4 yr repayment)
however it's not at all about a return on investment for the banks right now, all they want to do is get the stuff off their balance sheets
Posted by guest , Apr 29, 2008 7:09PM
Ayn Rand was an extremely attractive woman when she was young. She took work as a Hollywood extra for a time, and aspired to be an actress.
Readers of hers did develop infatuations with her, especially in the early years.
Like a lot of good-looking women, she couldn't tolerate the aging process. She had a much-younger male acolyte, who became her protege in Objectivism, the philosophy espoused by her novels. She carried on a long affair with this acolyte, but when she discovered that he had also taken another woman lover, she threw him out of her organization and never spoke of him again. His supposed excellence in Objectivism ceased to be of any importance.
Posted by guest , Apr 29, 2008 7:16PM
Wow, I did not know that about good ol' Aynie.